Daily Market Reports | Mar 27 2012
By Greg Peel
The Dow rose 160 points or 1.2% while the S&P gained 1.4% to 1416 and the Nasdaq added 1.8%.
There's nothing like bad news to get a stock market really fired up, is there? And that seems to have been the way of things since the GFC first ushered in QE1 in March 2009. The worse things get, the better it is, because Uncle Ben will just keep handing out the lollies.
Last night Fed chairman Ben Bernanke made a speech in Washington which was concluding as the opening bell rang on Wall Street. In the speech he queried the recent improvement in US employment and suggested the reduction from recession unemployment rates in the double digits to 8.3% now was likely only representative of the lay-offs occurring in that recession being reversed.
“To the extent that this reversal has been completed,” Bernanke suggested, “further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.”
So what exactly are “continued accommodative policies”? Zero rates out to 2014? Ongoing rollover of the QE2 balance sheet via Operation Twist? Or ongoing rounds of fresh quantitative easing? If you answered C, then you are among those on Wall Street last night who thought QE3 was gone but is now back on the table again.
We recall that when Bernanke left QE3 talk out of his rhetoric for the first time a couple of weeks ago, the Dow fell 200 points. Last night's 160 point gain might thus be seen as simply a prodigal reversal. But the Wall Street indices are now all well up above those psychological levels once more and if the quarter closed today, it would be the best March quarter since 1998.
As I noted yesterday, with the quarter ending on Friday we're probably in for a week of non-data related battles between the profit-takers and the window-dressers. In the meantime, US pending homes sales surprisingly fell 0.5% in February to again drive home the reality that there's no point in trying to call the trough in US housing. The Chicago Fed national activity index also saw a drop, to minus 0.09 from 0.33 in January. This result nevertheless indicates a pullback from strong economic growth to more average economic growth (zero being average).
There was also good news from across the pond, where Germany's IFO business climate index rose to 109.8 this month from 109.7 last month. Not exactly champagne stuff, but given the recent weak PMI results in the eurozone economists had worried business sentiment might weaken.
The IFO result helped the euro along, but QE3 talk had the US dollar dropping rapidly anyway on the possibility of more money printing. The dollar index fell 0.6% to 78.90. QE means monetary inflation and that's what gold bulls love, so gold rallied US$28.60 to US$1691.70/oz. The Little Aussie Battler has yet again tossed aside any talk of dropping back to parity. It is up 0.8% to US$1.0544.
Commodity markets were not quite so enthused, possibly with echoes of the Chinese slowdown still resounding. Copper rose 2% nevertheless, while the other metals were more subdued. Brent rose US52c to US$125.65/bbl and West Texas gained US26c to US$107.13/bbl.
The SPI Overnight is up 46 points or 1.1%.
It would be a shame if “continued accommodative policies” simply meant zero rates out to late 2014 – a policy that seems to be already set in stone. One wonders what sort of game Bernanke is playing with Wall Street, and why he needs to be so cagey. Note that he has never used the expression “QE3” or “QE2” or variations at any time, we simply infer such implications from the rhetoric. Did he err, from a propaganda perspective, in failing to keep QE3 alive in his recent monetary statement, and has now decided he better set things straight? Who knows.
Either way, his underlying argument is unquestionable. The US economy has had a spurt but Bernanke will not call things back to normal until the evidence is well and truly cemented. In the meantime, he is cautious and is expecting a potential dip in growth before we can really shake off the GFC impact. Next month will see the long round of March quarter corporate earnings results, and analysts suspect the glory days of strong earnings growth out of the recession have now passed. Weak results could be the catalyst for a break in the rally, and April is also “tax selling” month.
Then it's May, and we all know what happens in May.
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